Is There a J-Curve Effect in Sierra Leone? An Empirical Analysis with VECM ()
ABSTRACT
This paper examines the
relationship between exchange rate and trade balance in determining whether the
J-Curve phenomenon holds in the short and long-run for Sierra Leone during the
period 2002Q2
-2019Q4. The econometric technique commenced with an
assessment of unit root to ascertain the order of Unit Root and followed by an
Unrestricted Vector Autoregressive (VAR) estimation. The procedure leading to
using Vector Error Correction Model (VECM) was confirmed through Johansen
Cointegration test. The result suggests long-run relationship running between
exchange rate and trade balance for all
three model equations, but weakly for the Trade Balance Model, which is
also attested in the impulse response shock for trade balance and real
effective exchange rate. The Marshall-Lerner (ML) condition was also satisfied,
with the joint elasticity for Export and Import summing up to more than one.
The short-run dynamic situation for Sierra Leone was not satisfied with the
Wald Tests for all three models—this could be due to internal macroeconomic
bottlenecks associated with weaknesses in the real sector. The findings for
this study are relevant for Central Bank policy formulation and
fiscal consolidation efforts. It is highly recommended that domestic production
is boosted to ascertain macroeconomic stability in the economy.
Share and Cite:
Jackson, E. , Tamuke, E. and Sillah, A. (2021) Is There a J-Curve Effect in Sierra Leone? An Empirical Analysis with VECM.
Modern Economy,
12, 1486-1518. doi:
10.4236/me.2021.1210076.